In recent years, many accountants have advised their director/shareholder clients that the most tax efficient method of extracting profit from their family company was to pay themselves a low salary, at or around the £12,570 personal allowance, with the balance in dividends.
Is this strategy still effective?
With Corporation Tax rates as high as 26.5% on company profits in excess of £50,000, could it be more tax efficient to increase salary (or award a bonus) to bank Corporation Tax relief?
You could also consider increasing company pension contributions to take advantage of the new £60,000 annual allowance – especially under a salary sacrifice arrangement – and/or providing an electric company car; both of which are tax efficient and attract national insurance savings too.
However, it’s not always about saving tax.
There are lots of factors to consider including the level of profit realised and how much you need to draw out of the company to live on.
It is always a good idea to meet up, a couple of months before your accounting date to discuss the best actions to reduce your taxable profits. In addition to the points noted above, you could also consider:
• Bringing forward expenditure on equipment to take advantage of the 100% annual investment allowance (AIA) of up to £1 million/year on new and used equipment
• Making the most of “full expensing” on unlimited purchases of new items of plant and machinery
Saving Corporation Tax of up to 26.5p for every £1 spent is attractive – but don’t forget that if you purchase plant, machinery and equipment under HP arrangements, it must be brought into use before your accounting period ends to bank the tax relief.
Do we have a date in the diary? If not, call your usual CKLG contact on 01223 810100 to arrange one before it’s too late.